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October 27, 2005

Just Curious

Just wondering about gas prices, and how high they should be instead of how high they really are.

Are we looking at oil companies taking major advantage of their customers?

Remember the early 1970s, when gas prices were high for the times, the oil companies screaming of a shortage, when people had to drive up to long lines at the pumps on alternate days, depending upon whether their license plate numbers were odd or even, and meanwhile entire fleets of fully laden oil tankers sat calmly offshore, out of visual range?


So what, exactly, is happening now?

We're reading here that Exxon Mobile has made a 75% profit due mainly to the "increase in gas prices" resulting from the hurricanes that banged up their offshore rigs and some of their refineries. It stands to reason, therefore, that had they merely raised their prices to reflect the situation, they would balance out at about the same profit margin they did before prices "went up." Instead, they're collecting exponential profits, which means that if the price of gas, based on the per-barrel price, goes up 80 cents, they'll charge a dollar and a half, or somewhere thereabouts.

Yup, no question about it, I love the way Mobile Chevron and others demonstrate their patriotism by profiteering on natural disasters.

Posted by Seth at October 27, 2005 08:19 AM


Greetings from Oakland across the Bay (via GM's Corner).

Having read other commentaries and being refreshed on basic economics, I would interpret the run up in prices as just the expected market response to a sudden decrease in supply. This price rise discourages consumption (i.e. demand) and also sends signals to the suppliers as to where more supplies are needed. The profit margin (per gallon) would also rise since the underlying costs will not change much in the short run. (However, the total profit might or might not change, depending on total sales.)

The bigger issue is what the oil companies do with their "windfall" profits. The market signal is for the oil companies to spend more money on measures to increase supply -- repairing their damaged rigs, for instance, or increasing refinery capacity. This I think is where our attention should be more directed: whether the market operates correctly here or whether there is collusion afoot to restrict supplies. To my knowledge (and I'm just a layperson here) no credible evidence has demonstrated significant amounts of collusion.

Of course, living in California, we've heard for years of our leaders huffing and puffing and starting investigations whenever prices spike, but so far they've never turned up much of anything.

Good question, it made me think and try to put together what I've been reading recently. Hope this makes sense. Or perhaps someone more expert can explain things better.

Posted by: civil truth at October 27, 2005 03:45 PM

So, we're looking at increases based on the logistical needs of production, in this case, repairing hurricane damage and addressing the resulting decrease in supply. I must admit I hadn't given that as much thought as I might have, Civil Truth.

Thanks for the eye opener, :-)

I hope living in San Francisco for too long hasn't been infecting me with the local corporaphobia, LOL.

Posted by: Seth at October 27, 2005 09:11 PM